Office Development Can't Catch Up With Demand

PHOENIX-The boisterous office development that has occurred during the past three years still hasn’t caught up with demand in the Phoenix-metropolitan area, with the office vacancy rate dropping during the third quarter.

At the start of the fourth quarter, the vacancy rate in office buildings in the Valley dropped to 9.7%, down from 9.9% at the start of the third quarter, according to a recent study by CB Richard Ellis. During the third quarter, more than 480,000 sf of office space was absorbed.

“The national economy is good and the local market is good in the sense that existing tenants are growing in size, and there is an influx of groups from out of town,” Jerry Roberts, SVP of office properties with CB Richard Ellis, told GlobeSt.com. “We have transitioned a little bit from more of a sale office place to more of a regional headquarters market.”

National companies that have experimented in Phoenix with small sales offices or call centers have discovered that the temperate weather, available workforce and relative low cost of living makes it a place to develop larger operations, Roberts says.

“Phoenix has grown up a little bit as a city,” he says. “Ten years ago, a 50,000-sf user was huge; today they are plentiful.”

If the fourth quarter follows historical trends, then the coming three months will see the largest absorption of the year, Roberts says. During the last quarter of 1999, approximately 1.3-million sf of office space was absorbed, and Roberts expects similar numbers the final quarter of this year. Phoenix should end the year with approximately 3.2- to 3.4-million sf of net absorption, he says, making it the second strongest year for office product in the past decade, after last year’s absorption of 3.6-million sf.

The hottest office submarkets are Scottsdale and Camelback Corridor, and both areas are asking and getting rents at more than $30 per sf.

Scottsdale, with new access from Loop 101, has seen much of the new office development in the past three years. Nearly one-million sf of office space is currently under construction in the area. The vacancy rate in Scottsdale North is 5.7%.

The Camelback Corridor, which runs along Camelback Road from 16th Street to 44th Street, is home to the hottest office corner in the Valley: 24th Street and Camelback. The vacancy rate has dropped to 7.2%.

At the start of the fourth quarter, metropolitan Phoenix had an office inventory of more than 51million sf and 3.8-million sf of new office space under construction.